Project finance outlook bright despite turmoil
Manama, October 14, 2010
The project finance market has changed out of all recognition under pressure from the global financial crisis.
Before the crisis there were as many as 160 financial institutions involved in the industry but that is now down to about 30 and secondary markets to share risk have all but disappeared, according to HSBC managing director and head of project finance for Mena Jonathan Robinson.
But the prospects for project finance across the Middle East remain strong, he told delegates on the closing day of the AON Middle East Energy Insurance Conference at the Ritz-Carlton Bahrain Hotel and Spa yesterday.
'The beginning of 2009 was when the effects of the global crisis crystallised in the Middle East,' he said.
'The global slowdown in commodity prices meant projects here based on petrochemicals and mining were affected as a reflection on the fall in global prices and that called some projects into question.
'But while the West went into a recession the GCC continued to experience growth, even although this was a lot slower.
'But the issue is about relativity. In 2008, we were looking at growth of between seven and eight per cent and by 2009 this had fallen dramatically. But it was still growth when the West was effectively in recession.
'We are very upbeat as a bank regionally and we are investing in the region,' he said.
'But in project finance we face new challenges with the dramatic reduction of players in the market and the collapse of the secondary markets.
'Now you can no longer underwrite and syndicate as before. You have to take and hold.
'There are fewer banks in the market but there is still huge demand but banks are far more likely to prioritise,' he said.
In the past with 10 good clients you would have moved on the deal but now there is a need to look at client relationships and the underlying economic logic behind any deal a lot more carefully, he said.
'We now have to take and hold and that constrains the appetite for risk,' Mr Robinson said.
'In the past you could look at a $200 million to $300 million deal and look to sell two-thirds of the risk and hold onto one-third. Now you will likely have to hold the lot.'
However, he remained positive about the markets in the near future.
'We still think in the region the underlying economic rationale for project finance is strong.
'There are three core pillars for the project finance market going forward and these are petrochemical developments, utilities and infrastructure and the economic rational behind these remain very strong across the region,' he said.-TradeArabia News Service